Fixed interest sovereign bonds cannot provide the best investment solution for SMSF members looking for capital preservation while generating a reasonable yield, according to a global fixed income manager.
Speaking at the recent SMSF Trustee Empowerment Day 2016, Supervised Investments portfolio manager Phillip Carden said: “We need to consider what the risks are of buying what everyone considers to be a safe-haven investment.
“The market psychology at the moment seems to think that buying US Treasury bonds at 1.5 per cent is safe because there is this horrible terrible disaster coming and we’re going to be happy to be earning $15,000 a year on our $1 million superannuation for the rest of our lives.”
Carden said few people were considering the effect of inflation in the investment decision-making process.
“In reality the core inflation rate of the US is 2.5 per cent and with their bond rate of 1.5 per cent that’s a minus 1 per cent real rate of return and the inflation numbers as quoted by the Federal Reserve are very strong,” he noted.
“Also, it’s not out of the realms of possibility, we’re expecting it, that with this full employment, economic growth is not over-the-top strong, but it’s consistently strong, and in the context of change to demographic society it’s not out of the question that those bonds could go to 5 per cent.”
He suggested a better way to achieve security through investing coupled with a higher income stream for SMSF trustees would be via a fund manager offering bonds with floating interest rates in the asset-backed securities market.
Typically these types of managers issue senior, mezzanine and junior bonds to fund a loan pool that provides funding to a variety of businesses in a variety of economies, which helps investors with a level of diversification as well.
“Investing this way can provide a bit of a haven, but it is a nice haven to live in and will satisfy us with income, and if things don’t get any worse than they were in the past, we’re going to get all of our money back,” he said.